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MERCATUS STUDIES IN
POLITICAL AND SOCIAL ECONOMY
Entrepreneurship
and the Market Process
Edited by Arielle John · Diana W. Thomas
Mercatus Studies in Political and Social Economy
Series Editors
Virgil Henry Storr
Mercatus Center
George Mason University
Fairfax, VA, USA
Stefanie Haeffele
Mercatus Center
George Mason University
Fairfax, VA, USA
Political economy is a robust field of study that examines the economic
and political institutions that shape our interactions with one another.
Likewise, social economy focuses on the social interactions, networks,
and communities that embody our daily lives. Together, these fields of
study seek to understand the historical and contemporary world around
us by examining market, political, and social institutions. Through these
sectors of life, people come together to exchange goods and services, solve
collective problems, and build communities to live better together.
Scholarship in this tradition is alive and thriving today. By using the lens
of political and social economy, books in this series will examine complex
social problems, the institutions that attempt to solve these problems, and
the consequences of action within such institutions. Further, this approach
lends itself to a variety of methods, including fieldwork, case studies, and
experimental economics. Such analysis allows for deeper understanding of
social phenomena, detailing the context, incentives, and interactions that
shape our lives. This series provides a much-needed space for interdisci-
plinary research on contemporary topics on political and social economy.
In much of academia today, scholars are encouraged to work indepen-
dently and within the strict boundaries of their disciplines. However, the
pursuit of understanding our society requires social scientists to collabo-
rate across disciplines, using multiple methods. This series provides such
an opportunity for scholars interested in breaking down the boundaries
of disciplines in order to better understand the world around us.
More information about this series at

http://www.palgrave.com/gp/series/15998
Arielle John · Diana W. Thomas
Editors
Entrepreneurship
and the Market
Process
Editors
Arielle John Diana W. Thomas
Mercatus Center Institute of Economic Inquiry
George Mason University Creighton University
Fairfax, VA, USA Omaha, NE, USA
Mercatus Studies in Political and Social Economy

ISBN 978-3-030-42407-7 ISBN 978-3-030-42408-4 (eBook)
https://doi.org/10.1007/978-3-030-42408-4
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Switzerland AG 2021
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights
of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and
retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology
now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc.
in this publication does not imply, even in the absence of a specific statement, that such
names are exempt from the relevant protective laws and regulations and therefore free for
general use.
The publisher, the authors and the editors are safe to assume that the advice and informa-
tion in this book are believed to be true and accurate at the date of publication. Neither
the publisher nor the authors or the editors give a warranty, expressed or implied, with
respect to the material contained herein or for any errors or omissions that may have been
made. The publisher remains neutral with regard to jurisdictional claims in published maps
and institutional affiliations.
Cover illustration: © bernie_photo
This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Contents
1 Entrepreneurship and the Market Process 1

Diana W. Thomas and Arielle John
Part I Entrepreneurship in Theory
2 Diverted Attention During Recessions 13

Simon Bilo
3 Entrepreneurship as Complex, Bundled Decisions:

An Inframarginal Analysis 27
Keith Jakee and Stephen M. Jones-Young
4 Conceptualization of a Kirznerian-Ethnic Entrepreneur

in Market Sociology 67
Stephane Kouassi
5 Non-Market Competition as a Discovery Procedure 97

David S. Lucas
v
vi CONTENTS
Part II Entrepreneurship in Practice
6 The Comparative Liberty-Dignity Context

of Innovative Immigrant Entrepreneurship 123
Olga Nicoara
7 Economic Development Incentives: Fostering

Productive or Unproductive Entrepreneurship? 151
John A. Dove
8 Silicon Valley vs. Main Street: Regulatory Impact

on Entrepreneurial Ventures 171
Liya Palagashvili
Index 203
Notes on Contributors
Simon Bilo is Independent Economist in the USA. His current research

centers on questions of monetary non-neutrality, also known as “Cantillon
Effects” after the eighteenth-century economist Richard Cantillon. Bilo
is interested in Business Cycle Theory, History of Economic Thought,
International Economics, Austrian Economics, and Monetary Economics.
John A. Dove is Manuel H. Johnson Professor of Economics in the
Sorrell College of Business at Troy University, USA. He received his
Ph.D. from West Virginia University in 2012. Prior to joining the faculty
at Troy University, Dove was an Assistant Professor of Economics at
Mercer University. His main areas of research include public economics
and political economy. Dove’s academic work has appeared in such schol-
arly outlets as The Journal of Comparative Economics, The Journal of
Macroeconomics, Public Choice, Economics of Governance, Business &
Politics, and The Journal of Institutional Economics, among others.
Keith Jakee is Associate Professor at the Wilkes Honors College of
Florida Atlantic University, USA. His research tends to fall into one of
three areas, political economy, industrial organization, and entrepreneur-
ship. Before coming to the Honors College, he held tenured appoint-
ments at Monash University and in the Business School of the
Royal Melbourne Institute of Technology (RMIT University), both in
Melbourne, Australia. Jakee received his Ph.D. and MA at George
Mason University, where his dissertation research was supervised by Tyler
vii
viii NOTES ON CONTRIBUTORS
Cowen, Richard Wagner, Tom R. Burns, and the Nobel Laureate, James
Buchanan.
Arielle John is Senior Research Fellow, Associate Director of Academic
and Student Programs, and Senior Fellow for the F. A. Hayek Program
for Advanced Study in Philosophy, Politics and Economics at the Mercatus
Center at George Mason University, USA. Prior to joining the Mercatus
Center, she was an Assistant Professor of Economics at Beloit College
from 2014–2015, and then worked as the advisor to the Minister of Public
Administration and Communications in the Government of the Republic
of Trinidad and Tobago.
Stephen M. Jones-Young is Economist at the Coast Guard, USA. Prior
to joining the Coast Guard, Jones-Young earned his MA in Economics at
George Mason University and a Bachelor’s Degree in Economics at the
Harriet L. Wilkes Honors College at Florida Atlantic University.
Stephane Kouassi is Graduate Student in sociology at Goethe Univer-
sity, Germany. Kouassi is also an Adam Smith Fellow with the Mercatus
Center at George Mason University.
David S. Lucas is Assistant Professor in the Department of
Entrepreneurship and Emerging Enterprises at the Whitman School
of Management at Syracuse University, USA. His research interests
include entrepreneurship, institutions, organizations, and strategy, with
an emphasis on social issues like poverty and homelessness.
Olga Nicoara is Assistant Professor of Economics in the Department
of Business and Economics at Ursinus College, USA. She earned her
Ph.D. and MA degrees in economics from George Mason University
and her BSc degree in International Economics and Business from
Bucharest University of Economics. Nicoara’s scholarly interests are in the
fields of Economic Development, Political Economy, Austrian Economics,
Cultural Economics, Institutional Economics, and Entrepreneurship
Economics.
Liya Palagashvili is Assistant Professor of Economics at State Univer-
sity of New York—Purchase, USA. She is also a research fellow with
NYU Law. For the 2018–2019 academic year, she was a Visiting Scholar
in the Department of Political Economy at King’s College London. Pala-
gashvili’s research is on political economy and applied public policy.
She focuses on two main research areas: investigating the regulatory
NOTES ON CONTRIBUTORS ix
and public policy environment for technology startups and questions of

governance, polycentricity, and the role of external influence and aid on
institutions.
Diana W. Thomas is Associate Professor of Economics at Creighton
University’s Heider College of Business, USA. She is also Director of the
Institute for Economic Inquiry at Creighton University. She was previ-
ously an Assistant Professor of economics at the Jon M. Huntsman School
of Business at Utah State University.
List of Figures
Fig. 2.1 The initial equilibrium, E1 , shows the allocation

of entrepreneurial alertness between new investment
and restructuring of the existing factors of production
(Source Author’s creation) 20
Fig. 2.2 The new equilibrium, E2 , illustrates a change
in the allocation of entrepreneurial alertness from new
investment toward restructuring the existing factors
of production (Source Author’s creation) 21
Fig. 2.3 The allocation of entrepreneurial alertness into the three
types of activities: new investment (NI), fixing
the allocations of existing factors of production (Fix),
and rent-seeking (RS) (Source Author’s creation) 22
Fig. 2.4 The allocation of entrepreneurship into the three types
of activities with an increase in the demand for rent-seeking
(Source Author’s creation) 23
Fig. 2.5 The allocation of entrepreneurship into the three
types of activities with an increase in the demand
for rent-seeking and fixing the allocations of the existing
factors of production during recession (Source Author’s
creation) 24
Fig. 6.1 A two-dimensional representation of the direction
of the flows of innovative immigrant entrepreneurs based
on our Comparative Liberty-Dignity Framework 132
xi
xii LIST OF FIGURES
Fig. 6.2 Net migration rates and quality of economic institutions

across top 15 and bottom 15 countries by net migration
flows (2010–2015) (Source Chart and calculations are
based on data from The World Bank’s World Development
Indicators [The World Bank 2019], and Hugo Montesinos
[2019]) 136
Fig. 6.3 Net migration rates (2010–2015), economic freedom
of the world (2016), and cultural and social norms
towards entrepreneurship (2017) (Source Calculations
and illustration are based on data from The World Bank
[2019], The Fraser Institute [Gwartney et al. 2016],
and The Global Entrepreneurship Monitor [2018]) 142
Fig. 7.1 Productive entrepreneurship and economic development
incentives (Note Entrepreneurship measure from Sobel
[2008], Incentives index from Patrick [2014a]. Source
Author’s creation) 158
Fig. 7.2 Unproductive entrepreneurship and economic development
incentives (Note Entrepreneurship measure from Sobel
[2008], Incentives index from Patrick [2014a]. Source
Author’s creation) 159
Fig. 7.3 NEP and economic development incentives (Note
Entrepreneurship measure from Sobel [2008], Incentives
index from Patrick [2014a]. Source Author’s creation) 159
List of Tables
Table 5.1 The context of human action 99

Table 5.2 Nonmarket entrepreneurship and the institutional
hierarchy 103
Table 6.1 Net migration, population, net migration rate per 1000
people, economic freedom over the past 30 years, top
and bottom countries (2010–2015) 135
Table 6.2 High status to successful entrepreneurs, and perception
of entrepreneurship as a good career choice, top 15
and bottom 15 countries (2017) 139
Table 6.3 Innovation, and cultural and social norms based on GEM
survey data. Top 15 and bottom 15 countries (2017) 141
Table 7.1 Summary statistics 160
Table 7.2 Productive, unproductive, and net entrepreneurial activity 162
Table 7.3 Productive, unproductive, and net entrepreneurial activity
(1990) 164
Table 7.4 Productive, unproductive, and net entrepreneurial activity
(1980) 166
xiii
CHAPTER 1
Entrepreneurship and the Market Process
Diana W. Thomas and Arielle John
Why Entrepreneurship Is Important

In his 1964 presidential address to the Southern Economic Association
membership, James Buchanan famously asked the provocative question
“What should economists do?” Buchanan’s question was explicitly moti-
vated by his assessment that the discipline had gotten lost in doing “what
economists do” without consideration of what would constitute scien-
tific progress. More specifically, James Buchanan was advocating for an
economics that would place the “theory of markets” rather than the
“‘theory of resource allocation’ at center stage” (1964, p. 13) and return
to Adam Smith’s observation that there is a propensity in human nature to
“truck, barter, and exchange one thing for another” (Smith 1776, p. 25).
The orthodoxy Buchanan was constructively critiquing was neoclassical
price theory, which examines the patterns of equilibrium prices, costs,
D. W. Thomas (B)
Institute of Economic Inquiry, Creighton University, Omaha, NE, USA
e-mail: dianathomas@creighton.edu
A. John
Mercatus Center, George Mason University, Fairfax, VA, USA
e-mail: ajohn@mercatus.gmu.edu
© The Author(s) 2021 1

A. John and D. W. Thomas (eds.), Entrepreneurship and the Market
Process, Mercatus Studies in Political and Social Economy,
https://doi.org/10.1007/978-3-030-42408-4_1
2 D. W. THOMAS AND A. JOHN
and output in different markets with specific emphasis on the allocation

of resources in equilibrium. The goal of the price theoretical apparatus
is to understand the requirements of general equilibrium, identify the
paths toward equilibrium that price and quantity may take, and state the
price and quantity combinations that will satisfy equilibrium conditions
across different markets. In investigating the effects of government policy,
price theory focuses on the changes in equilibrium price and quantity that
changes in policy will bring about.
Lacking from orthodox price theory, in Buchanan’s assessment, was a
focus on “man’s behavior in the market relationship […] and the mani-
fold variations in the structure that this relationship can take” (Buchanan
1964, p. 214). The alternative approach to studying economic behavior
he proposed was explicitly focused on exchange relationships and the
various forms they could take in both markets and politics. Buchanan’s
extension of this analytical focus to include spheres other than markets,
and specifically politics, always assumed that individual behavior and
cooperative relationships individuals engaged in depend on the rules of
the game or the institutional structure in place to constrain individual
behavior.
Buchanan was, of course, not alone in his critique of the path modern
economics had taken throughout the beginning of the twentieth century.
Israel Kirzner similarly argued that price theory was missing a descrip-
tion of how the actions of individual market participants interact to bring
about changes in prices, quantities, and in the manner resources are
allocated to competing uses (Kirzner 1973, p. 6). Price theory notori-
ously stresses that there are but three factors of production—land, labor,
capital—to be optimized when making production decisions, but seems to
take for granted who exactly is meant to do the optimizing. In Kirzner’s
own words, an analytical framework devoid of entrepreneurs “completely
lacks the power to explain how prices, quantities and qualities of inputs
and outputs are systematically changed during the market process” (1973,
p. 42) and so cannot explain how the market equilibrates. Kirzner argued
that in order for such considerations to enter the analysis, the analyst
would have to shift her focus toward the competitive process and the role
of the entrepreneur in perpetuating the competitive process. Crucially,
entrepreneurship was the fourth factor of production missing from the
neoclassical price theory.
Put differently and using the language of orthodox price theory, rather
than focusing on the slope of the production possibilities frontier and
1 ENTREPRENEURSHIP AND THE MARKET PROCESS 3
its intersection with individual indifference curves, this market process

perspective advocated by Buchanan and Kirzner (among others) analyzes
how movements of the curve and pivots in its slope come about over
time, what the institutional determinants of human action in markets and
in politics are, and how exchange relationships change when institutions
evolve.
Israel Kirzner specifically contributed to market process theory by
introducing a theory of entrepreneurship that accounts for the differ-
ential alertness and awareness of entrepreneurs. More specifically, in
Kirzner’s model, entrepreneurs bring about the process of equilibra-
tion of market relationships by acquiring “more and more accurate and
complete mutual knowledge of potential demand and supply attitudes”
through entrepreneurial discovery (Kirzner 1997, p. 62). This discovery
of information is the essential function entrepreneurs supply in the market
process. They are alert to opportunities for arbitrage across space—as is
the more traditional understanding of arbitrage—and time, and by acting
upon those opportunities bring about changes in existing exchange rela-
tionships in the market. In doing so, they can, of course, commit errors,
but the insistence upon the integration of an entrepreneurial perspective
into the analysis of market relationships ensures a description of systemic
adjustments to new and ever-changing information and constraints.
For Kirzner, incomplete and imperfect knowledge are facts of human
life that lead to errors in decision-making in the market context all
the time. For example, an entrepreneur may believe that her poten-
tial customers want to purchase her red shoes for $20 each, when in
fact for the quantity she is producing, price should be closer to $30.
Therefore, she may erroneously under charge for her shoes. However,
alert market participants are able to recognize these sorts of errors with
time. According to Kirzner, another person would likely notice the profit
opportunity that emerges from the discrepancy between what she is
charging and what her customers are willing to pay. That person may
buy her shoes at the lower price she is charging and sell them at the
higher price somewhere else. Processes like these drive markets toward
equilibrium prices and quantities. In Kirzner’s own words, writes, “the
entrepreneurial element in the economic behavior of market partici-
pants consists … in their alertness to previously unnoticed changes in
circumstances which may make it possible to get far more in exchange
for whatever they have to offer than was hitherto possible” (1973,
pp. 15–16).
While Kirzner develops his theory of entrepreneurship in the context

of markets, the individual entrepreneur’s alertness to differential oppor-
tunities for profit is essential in driving the process of entrepreneurial
discovery not only in markets, but across different institutional settings.
All cooperative and collective human endeavors, whether in the context
of markets, politics, or society more generally require adjustment to
and incorporation of new information into the institutional context in
order to allow individuals that operate within this context to coop-
erate with each other successfully and go about the satisfaction of their
individual wants and desires more effectively. The existing literature on
entrepreneurship in politics and social organization more generally is
multi-faceted and vast, but an entrepreneurial perspective has been applied
to culture (Storr 2008; Storr and John 2011; John and Storr 2018),
policy change and rent-seeking activities (Simmons et al. 2011; Coyne
et al. 2010; DiLorenzo 1988; Holcombe 2002) institutional change
in politics (Martin and Thomas 2013), non-profits (Haeffele and Storr
2019), how communities rebuild and revive following natural disasters
(Chamlee-Wright and Storr 2010; Storr et al. 2016), and economic
development (Chamlee-Wright 2002; Haeffele and Hobson 2019).
Economists of the Austrian school in particular have advanced Kirzne-
rian ideas of entrepreneurship into studies of culture, community
recovery, and politics. The driving question provided by Kirzner in many
of these treatments is: What types of opportunities will entrepreneurs in
various contexts be alert to? For example, Storr and John (2011), use
Kirznerian theory to demonstrate how culture can shape entrepreneurial
gaze. They posit that “culture will direct an entrepreneur’s gaze as
well as her ability to recognize certain opportunities as in fact oppor-
tunities” (p. 89). To demonstrate how entrepreneurs with different
cultural backgrounds can be alert to different opportunities, the authors
provide accounts of different of flavors entrepreneurship in Bahamas and
in Trinidad and Tobago, and they connect these different flavors of
contemporary entrepreneurship to each island’s economic history. Based
on prior experiences under slavery and colonial rule, today’s Bahamian
entrepreneurs have a “master pirate” side that is ever ready to hustle, trick,
and swindle to make money, but also an “enterprising slave” side, that
words diligently and honestly to attract business. In Trinidad and Tobago,
where different ethnic groups had dissimilar experiences in the economy
pre-and post-independence, some appear to be more alert to opportuni-

ties for commercial enterprise, while others tend to look to politics and
the bureaucracy for economic advancement.
John and Storr (2018) also consider the role of culture through
another popular notion of entrepreneurship discussed in Austrian
theory—the Schumpeterian view. They argue that while alertness
to/identification of a profit opportunity is the essential moment of
entrepreneurship for Kirzner, for Schumpeter, it is the actual acting upon
the opportunity that constitutes entrepreneurship. According to Schum-
peter (1961, p. 66), the crucial entrepreneurial role is the carrying out
of new “combinations” of the means of production, that is: creating
new goods, improving the quality of existing goods, creating new
methods of production, opening new markets, finding new supplies of
resources, or discovering new ways to organize an industry. The authors
contend that focusing on both the Kirznerian (seeing) and Schumpete-
rian (doing) views of entrepreneurship enables more fine-grained analysis
of entrepreneurship. They observe that certain aspects of the cultural
context and institutional environment in Trinidad and Tobago promote
people’s alertness to entrepreneurial opportunities there, while other
cultural and institutional aspects dampen this alertness. The same is true
for opportunity exploitation.
Regarding community recovery, again, a focus on the entrepreneur
helps us to understand who will take up the charge of rebuilding
communities, and what methods will or will not work for them. Chamlee-
Wright and Storr (2010) examined the Vietnamese community in New
Orleans following the devastation of Hurricane Katrina, finding that
social entrepreneurship played an integral part in that community’s ability
to recover following the hurricane. Entrepreneurs steeped in the local
context needed to be alert to needs of their fellow community members
in order to “coordinate recovery efforts, lobby for essential government
assistance and provide key information and services to help displaced resi-
dents return and rebuild their communities” (p. 154). One such social
entrepreneur was the pastor of the Mary Queen of Vietnam Catholic
Church, Father Vien, who provided leadership by continuing to hold
mass, checking up on his congregants at evacuation sites, persuading them
to return to the community, and facilitating their return.
An important question in political economy is whether the political
domain is like the market domain in terms of its ability to use and
generate knowledge, and to coordinate productive activity with efficiency.
Thomas and Thomas (2014) consider the limits of the application of

insights from entrepreneurial process theory to politics, arguing that the
absence of price signals in politics prevents the entrepreneurship theory
from being fully applicable. However, the authors harness insights from
James Buchanan to demonstrate that at the constitutional level of poli-
tics, where general rules of the political game must be selected, political
entrepreneurship is certainly possible and may even be efficient. Salter
and Wagner (2018) argue that one way in which political entrepreneur-
ship may manifest is through competition or contestation over alternative
interpretations of constitutional rules.
Applied Research in Political

Economy: Entrepreneurship
The contributions to this edited volume all share in common a focus
on this Kirznerian market process perspective. Contributions in Part
I focus on theoretical extensions and critiques. Simon Bilo offers an
extension of the Kirznerian theory of entrepreneurship, with particular
application to conditions of economic recessions. Bilo argues that the
systematic re-valuation of previously malinvested capital during a recession
has significant effects on the relative alertness of entrepreneurs to different
productive and unproductive investment entrepreneurial ventures and
can result in either a re-allocation of the re-valued assets of a focus on
relatively unproductive entrepreneurial opportunities in case of political
intervention and targeted stimulus spending.
Keith Jakee and Stephen Jones provide a critique of the Kirznerian
conception of entrepreneurship based on its reliance on neoclassical,
marginal analysis, which, as they argue, is founded on several unreal-
istic assumptions and therefore not representative of true entrepreneurial
choice. Jakee and Jones suggest that rather than using marginal anal-
ysis based on twice-differentiable isoquant and isocost curves, the study
of entrepreneurial decision-making requires a focus on total costs and
corner-solutions to adequately deal with the problems of indivisibility,
static knowledge problems, radical uncertainty, and transaction costs.
Stephane Kouassi’s chapter titled Conceptualization of a Kirznerian-
Ethnic-Entrepreneur in Market Sociology offers an extension of the
Kirznerian framework of entrepreneurship into the domain of culture,
taking into consideration insights from contemporary sociology regarding
the “cultural determinants of the process of identification, evaluation and
exploitation of entrepreneurial opportunities.” Kouassi’s chapter offers a

theoretical model for how cultural factors may systematically promote or
hinder certain types of entrepreneurial discovery.
In his chapter titled Non-market Competition as a Discovery Proce-
dure, David Lucas synthesizes the existing literature applying Austrian
market process theory to non-market contexts. In doing so, Lucas is
able to identify shared theoretical insights and shortcomings in this liter-
ature and point to potential areas for fruitful future inquiry, as well as
potential stumbling blocks for the systematic application of the market
process perspective to non-market contexts like politics, institutional
development, cultural norms, and crime.
Part II offers various applied perspectives on entrepreneurship. Olga
Nicoara provides an analysis of how an understanding of the quality of
formal institutions along with cultural attitudes toward entrepreneurship
influence the entrepreneurial decisions of immigrants. She argues that
immigrants from countries with lower overall institutional quality and
cultural attitudes that are less supportive of entrepreneurial ventures will
be more likely to become innovative entrepreneurs once they migrate
to countries with institutions and cultural attitudes more supportive of
entrepreneurship generally.
John Dove’s chapter, “Productive Entrepreneurship, Unproductive
Entrepreneurship, and Public Sector Economic Development Restric-
tions: Understanding the Connections”, offers an empirical analysis of
Baumol’s (1990) prediction of the institutional variability of the rela-
tive prevalence of the types of entrepreneurship that can be observed in
a particular society at a given point in time. Baumol famously suggests
that institutions can change the relative profitability and therefore the
relative prevalence of productive market entrepreneurship as compared
to unproductive and even destructive types of extractive political (rent-
seeking) entrepreneurship. Dove’s analysis uses several indices measuring
the relative profitability of productive and unproductive entrepreneurship
in different states from Sobel (2008) as well as an index measuring the
extent to which states provide non-tax economic development incen-
tives from Patrick (2014). His results confirm Baumol’s theoretical
prediction that institutional environments that offer greater rewards
for non-productive entrepreneurship will generate more unproductive
entrepreneurial activity.
Finally, examining the impact of regulatory policy on entrepreneur-
ship, Liya Palagashvili, provides a potential theoretical explanation for
the variability in new business starts across different industries, and

more specifically for the concurrent empirical decline in new firm starts
among main-street businesses and increase in new business starts among
tech-startups.
Across and between the different contributions to this edited volume,
the authors provide a rigorous and thorough assessment of both the limi-
tations and the benefits of the entrepreneurial perspective to analysis of
markets. We are grateful for their work and the synergies and overlaps
that have developed across the different chapters over the last two years
since they were first presented at a conference sponsored and organized
by the Mercatus Center at George Mason University.
References
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Destructive. Journal of Political Economy 98 (5): 893–921.
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Chamlee-Wright, Emily. 2002. The Cultural Foundations of Economic Develop-
ment: Urban Female Entrepreneurship in Ghana. New York: Routledge.
Chamlee-Wright, E., and V. Storr. 2010. The Role of Social Entrepreneurship
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ties: People and Places in the Global Economy 12 (5): 582–610.
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PART I
Entrepreneurship in Theory
CHAPTER 2
Diverted Attention During Recessions
Simon Bilo
Introduction
Human attention has limits, and people, at least to some extent, choose
what they pay attention to. I explore how limited, or scarce, atten-
tion might matter during recessions, when entrepreneurs suddenly face
a cluster of opportunities resulting from previous misallocations of factors
of production. Entrepreneurs’ alertness is, at that point, suddenly divided
between the profit opportunities from fixing the existing production
processes and the opportunities for brand-new investment projects. As
a result, entrepreneurs decide to postpone or discard some of the possible
new projects. This discussion of the limits of entrepreneurial alertness
is useful for two reasons. First, it provides an additional—and to my
knowledge novel—framework to understand the procyclical character of
aggregate investment that, for example, Stock and Watson (1998, 13)
document. Of course, the framework is a complement to rather than a
substitute for the existing theories that account for that procyclical char-
acter because the procyclicality is a generally accepted stylized fact. In one
way or another, business cycle models therefore incorporate this fact as,
S. Bilo (B)
Arlington, VA, USA

https://doi.org/10.1007/978-3-030-42408-4_2
14 S. BILO
for example, Plosser (1989) exemplifies for real business cycle theory and
Lucas (1977) for new classical theory.
Second, it leads to an analytic framework that captures the allocation
of entrepreneurship during recessions. I later enhance the baseline frame-
work with an extension that includes unproductive entrepreneurship, such
as rent-seeking associated with fiscal expansion, as such entrepreneurship
can aggravate recessions.
My discussion of the allocation of entrepreneurship during a recession
lies at the intersection of three sets of literature. First, it builds on the
stylized fact that recessions tend to reveal clusters of errors, as suggested
by Hayek in his Copenhagen lecture ([1939] 1975, 141), meaning that
recessions are associated with a large number of entrepreneurs real-
izing that their projects are unprofitable. This fact can be observed
indirectly—for example, through increases in the number of bankrupt-
cies during recessions, as documented by Altman (1983) and Platt and
Platt (1994), through procyclical employment and countercyclical unem-
ployment (Stock and Watson 1998, 15), or through higher dispersion
of total-factor-productivity growth rates across industries (Eisfeldt and
Rampini 2006). I link the first two observations with what seems to be
a reasonable assumption: that companies usually do not plan to go out
of business and people usually do not plan to become unemployed. The
dispersion of total-factor-productivity growth is also consistent with the
existence of suddenly revealed mistakes that slow output growth in certain
industries.
The higher incidence of recognized errors during the recession matters
because it implies that the existing allocations of factors of production—
both capital and labor—might be inefficient, requiring their repurposing,
which is costly and requires imagination. In other words, investments are
to some extent irreversible because of the specificity and heterogeneity of
factors of production, which connects my discussion with a second stream
of literature. Some of the works on the irreversibility of investment under
uncertainty—including Bernanke (1983), Majd and Pindyck (1987), and
Pindyck (1993)—emphasize the irreversibility of deployed factors of
production from an ex ante perspective (that is, before investment). My
discussion instead focuses on what to do with already-existing capital
goods ex post, as emphasized by the Austrians, including Hayek ([1935]
1967), Mises ([1949] 1966, 503–514), Lachmann ([1956] 1978), and
Garrison (2001). The ex post emphasis is the appropriate one in the
context of recessions: during recessions entrepreneurs face the problem
2 DIVERTED ATTENTION DURING RECESSIONS 15
of the misallocation of existing irreversible investment. Witnessing a

large number of specific factors of production employed in unprofitable
production processes, they have to decide which ones to repurpose and
which ones to discard. The rearranging of such factors is not a trivial
problem; it resembles that of a five-thousand-piece jigsaw puzzle that was
designed to portray the painting of Mona Lisa and has to be reassembled
into a picture of Mickey Mouse after some kids lost or disfigured many
of the pieces. Such reassembly is costly, and for the same reason is that of
factors of production. While reassembling the factors of production repre-
sents new possible profit opportunities, it also imposes a demand on the
limited attention, or alertness, of entrepreneurs. Their attention is more
diverted than it otherwise would be and thereby must be spread more
thinly across other competing demands.
My discussion on how these limits on entrepreneurs’ alertness play
out during the recession builds on a third stream of literature: the
works of Kirzner, Baumol, and Gifford, where Kirzner ([1973] 1978)
represents the methodological base for thinking about entrepreneur-
ship, Gifford (1992) highlights the importance of limited attention of
entrepreneurs, and Baumol (1990) illustrates how changing incentives
change entrepreneurial outcomes. Kirzner’s ([1973] 1978) key insight is
that entrepreneurial alertness, which can be described as “knowing where
to look for knowledge” (68), is an essential part of the market process.
Markets cannot work unless people are alert to and perceive profit oppor-
tunities. This means, Kirzner [1973] 1978, 225–231) argues, that even
the absence of transactions costs, which include information costs, is not
enough for markets to equilibrate. Entrepreneurs, according to Kirzner,
also have to perceive the importance of available information regarding
potential profit opportunities.
I continue with what hopefully is a reasonable assumption: that Kirzne-
rian alertness has limits and that if entrepreneurs ponder a certain set
of information, they are not able to do so with some other informa-
tion set. This follows along the lines of Gifford (1992), who recognizes
the limited attention of entrepreneurs, although, unlike Gifford, I do not
distinguish between the attention entrepreneurs give to “current opera-
tions” and that given to “prospective projects,” because such a distinction
does not fully capture the decisions entrepreneurs have to make about
misallocated factors of production during recessions. Under the assump-
tion of alertness with limits, I turn to Baumol’s (1968, 1990) general
idea that different structures of incentives determine the “allocation of
16 S. BILO
entrepreneurial inputs” (1990, 897), understanding the term “input” as

Kirzner’s “alertness.”
Using this connection of Baumol’s, Gifford’s, and Kirzner’s ideas, I
apply Baumol’s conceptual description to a framework with microfounda-
tions. However, unlike Baumol (1990), I do not consider the allocation
of entrepreneurship in the context of long-run economic growth, but,
instead, in the context of a recession, when it turns out that many factors
of production, both capital and labor, cannot remain employed as initially
intended. Entrepreneurs’ production costs (in the case of capital) and
costs of acquiring human capital, hiring, and training (in the case of labor)
are already sunk and do not matter when considering factor reallocation.
Remaining quasi-rents associated with the factors then represent potential
new profit opportunities, thereby incentivizing the entrepreneurs to turn
their alertness from investing in brand-new production processes toward
salvaging existing factors of production. The necessary assumption is that
the existing factors of production are substitutes for rather than comple-
ments to new investments. Accordingly, the resulting decrease in new
investment is in line with the stylized fact of procyclical investment.
As I suggested before, this model of allocation between the two
types of entrepreneurial activities—new investment and fixing the old
allocations of capital and labor—can also be extended to include the real-
location of entrepreneurial alertness into unproductive and destructive
activities, as Baumol (1990) explores in the context of economic growth.
This extension makes it possible to analyze the consequences of a possible
fiscal-stimulus response to a recession, where new, unproductive rent-
seeking opportunities associated with the stimulus divert entrepreneurial
alertness from productive activities, including new investment. Such
diversion then makes aggregate investment even more procyclical. This
extension relates to Takii (2008), who also discusses the interrelation-
ship of entrepreneurship and fiscal policy, although in a different context,
in which fiscal expansion tends to crowd out private consumption. As
government then plays a larger role in the market and it is, by assump-
tion, less capable of identifying changes in the tastes of consumers than
entrepreneurial firms, overall output decreases.
Alertness and the Metaphor of Allocative Choice

Whenever one talks about an allocation, one tends to think of stan-
dardized factors of production with well-defined units. The production
decision regarding the factors is then a technological problem that

Kirzner ([1973] 1978) somewhat pejoratively calls Robbinsian maxi-
mizing because it is mechanical and therefore does not encapsulate the
discovery aspect of the market process. Talking about the allocation
of entrepreneurship and entrepreneurial alertness, as I do, thus raises
red flags, particularly if one at the same time claims to be building on
Kirzner’s insights. These concerns become even more pressing with the
realization that Kirzner [1973] 1978, 66) does not view entrepreneurship
as a factor of production. After all, entrepreneurship is not an ingre-
dient that one simply adds to a well-defined production function to get
predictable output levels. It might be for this reason that there is no
market for entrepreneurial alertness, while, at the same time, markets
work because of the alertness.
To reconcile my representation of entrepreneurship with Kirzner’s, I
follow the approach outlined by Storr and John (2011), who consider
Kirzner’s model of entrepreneurship in light of the objection that it
does not account for a number of important factors possibly impacting
entrepreneurship, including cultural and psychological factors. Storr and
John (Storr and John 2011, 88–89) argue that one does not necessarily
have to view Kirzner’s model as deficient; instead, it should be viewed as a
baseline model pinpointing the nature of entrepreneurship, which invites
additional extensions, such as cultural influences.
My own extension starts with the consideration that it would be unrea-
sonable to say that entrepreneurial alertness manifests at random and that
entrepreneurs have no say over the industries and types of products on
which they want to focus. As long as we accept that people have some
freedom to choose, it is reasonable to say that they choose, even though
not entirely, what to think about. This is not just a philosophical insight,
but also practical one: if our attention is limited, being able to focus on
priorities is a matter of evolutionary survival.
Of course, as long as the matter of limited attention is not impor-
tant for an analytic framework, it is reasonable to assume it away. Such
assuming is not appropriate in the present case, however. The attention of
entrepreneurs during a recession might get overwhelmed with competing
demands, forcing them to choose what to pay attention to. It is the
need to capture such a choice that constitutes my rationale for looking
at entrepreneurial alertness as if it was a factor of production.
This emphasis on the incentives of entrepreneurs is very much in line
with Baumol’s (1968, 69–70) view on how economists should approach
18 S. BILO
the topic of entrepreneurship. He points out that it is perhaps impos-

sible to have a full understanding of the determinants of the supply of
entrepreneurship and its quality, but it might be possible to analyze the
incentives shaping entrepreneurs’ activity. For example, he suggests that
different tax structures might have an effect on entrepreneurs’ risk-taking
and their involvement with research and development.
The metaphor of allocation of alertness can take one only so far,
however. It does convey both the limits to alertness and the profit-
motivated choice over what one is alert to, but it cannot capture all
aspects of entrepreneurship, notably acting in an uncertain world. It is
with this caveat that I approach the discussion that follows.
Quasi-Rents and Profit Opportunities

When entrepreneurs allocate their alertness during a recession, their
choice has some specific characteristics. Recessions reveal many previous
mistakes, embodied in misallocated factors of production. This might, for
example, mean that factories built and equipped during the boom are
unprofitable in their intended uses, that they have to be shut down, and
that the workers who were trained to operate the factory equipment have
to find new employments. Awareness of these factors allows entrepreneurs
to see new, related profit opportunities, channeling their alertness toward
corresponding factor reallocations.
The argument that entrepreneurs shift alertness during the recession,
however, rests on the assumption that reallocation of the existing factors
is more profitable than, let’s say, creation of brand-new factors of produc-
tion. This higher profitability comes with the sunk-cost character of the
previously misallocated factors. While the factors employed in unprof-
itable production processes do not make enough revenues to cover their
own amortization, they are still useful, even though it does not pay to
replace them once they wear out (in the case of capital) or to train new
workers (in the case of labor). What matters is whether the difference
between the return of the factors and the variable cost is sufficient to
attract an owner or employer. This difference is also known as quasi-rent,
which Alchian (2006, 577) defines as “the portion of the revenue from
the use of some equipment in excess of current operating cost and which
covers at least some of the initial, past investment cost of having produced
that equipment.”
How much of this quasi-rent the prospective owner or employer has to

pay for a capital good or for hiring labor is, of course, negotiable, and it
is somewhere between zero and the quasi-rent. But the negotiability also
means that the profit coming from hiring the labor or owning the capital
is also flexible and might stretch—within the given quasi-rent constraint—
enough for the project to compete with the alternative entrepreneurial
projects. It is this flexibility that incentivizes entrepreneurs during a reces-
sion to be more alert to exploring new uses of the existing misallocated
factors rather than to producing new factors of production.1
Let me illustrate with an example of a machine that makes rubber soles
for shoes. Assume the same machine can be repurposed to make chewing
gum. Let’s say the owner built the machine at a cost of $1000, expecting
the present value of the variable costs to be $100 and the present value
of the revenues to be $1100. While he could use the machine for making
chewing gum, the fixed and variable costs would be the same but the
present value of the revenues would drop to $500.
Let’s say that contrary to the owner’s expectations, nobody wants new
shoes and the expected revenues from selling shoes drop to zero. The
owner goes out of business and puts the machine up for sale. Since it
can still produce chewing gum and the expected demand for the gum is
unchanged, the machine is going to sell at a positive price. The quasi-rent
associated with chewing gum production is $400, and the price of the
machine can thus range between one cent and $400. It will end up being
low enough within the range to attract an entrepreneur with sufficient
profit to divert her attention from other activities.
Can one say that all entrepreneurial attention will be diverted from
starting new projects that include brand-new factors of production during
the recession? Of course not, but entrepreneurs have an incentive to
divert their attention more than they otherwise would have. Again, the
necessary underlying assumption is that the existing capital goods and
existing employees with their human capital are substitutes for rather than
complements to new investments.
1 Note that the repurposing of the factors can happen within a company, though the
repurposing is less visible to external observers.
20 S. BILO
$ PNI*MPENI PFix*MPEFix
0NI E1 0Fix
Fig. 2.1 The initial equilibrium, E1 , shows the allocation of entrepreneurial

alertness between new investment and restructuring of the existing factors of
production (Source Author’s creation)
Allocation of Alertness During

Recession: The Baseline Model
My model is a metaphor that conveys the idea of entrepreneurs choosing
the focus of their alertness. The expected relative profitability of the
different opportunities is the criterion of such choice, and more profitable
opportunities therefore tend to attract more alertness.
Entrepreneurial alertness in my model2 is a factor of production whose
production function has the standard property of diminishing marginal
returns. I assume that there is a fixed amount of alertness and that this
alertness can be allocated to two types of projects. One type predom-
inantly pertains to new investment, for which I use the corresponding
subscript of “NI.” The projects associated with subscript “Fix” pertain
to rearranging the existing factors of production into more efficient
allocations.
Figure 2.1 shows an initial equilibrium, in which the product of the
price (P) of output and the marginal product of entrepreneurial alert-
ness (MPE) is the same for the two types of projects. Note that the
amount of entrepreneurial alertness is in this model given, which is
why the horizontal axis is boxed in from both sides. The more to the
2 This model is inspired by Feenstra and Taylor’s (2014, 69) model, which they use in
the context of the labor market’s responses to international trade shocks.
right the equilibrium point (E) moves along the axis, the more alertness
entrepreneurs direct toward new investment projects.
Now the recessionary shock hits the economy. To keep things simple,
I assume that the profitability of the prospective new projects does
not change. The rearranging of the existing factors of production will
compete for entrepreneurs’ attention, and portions of the quasi-rents
are in this competition offered to the entrepreneurs to incentivize them
to use the existing factors of production instead of focusing on other
projects. The higher profitability of rearranging does not mean there are
new possibilities for using the existing factors, so the marginal product of
the entrepreneurial input itself does not change. Instead, it is the price of
the given marginal product that increases thanks to the higher fraction
of the quasi-rent captured by the entrepreneurs. Figure 2.2 illustrates
my reasoning and shows how the recessionary shock and related need
to reallocate existing factors of production also changes the allocation
of entrepreneurial alertness. Of course, if less alertness goes toward new
investment, the amount of new investment decreases, alertness being one
of the inputs.
Fig. 2.2 The new equilibrium, E2 , illustrates a change in the allocation of

entrepreneurial alertness from new investment toward restructuring the existing
factors of production (Source Author’s creation)
22 S. BILO
Allocation of Alertness During

Recession: An Extension
I now extend my model to account for the government’s fiscal expansion,
which is often characteristic of governments facing recessions. I treat the
fiscal expansion as a shock, or an unanticipated event, as with the recession
itself.
The additional government expenditures are potential rents that people
compete for, along the lines discussed by Tullock (1967) and Krueger
(1974). Rents are therefore profit opportunities that incentivize rent-
seeking and distract entrepreneurs from other activities—in this model,
investing in new projects or reconfiguring existing factors. Entrepreneurs
then have another reason to divert alertness from possible new invest-
ment, which tends to drop even further compared to the previous
model.
My revised model reflects the increase in the number of possible
allocations of entrepreneurial alertness to three possible sectors. Instead
of a two-dimensional box diagram with the total amount of alertness
unchanged, the updated model therefore shows the tendencies of the
allocations of alertness in response to shocks. I proceed in three steps:
After starting in equilibrium (step one), step two shows how the higher
rents associated with the stimulus affect the allocation of alertness. Step
three combines the effects of these new rents with the insights about the
allocation of entrepreneurship during the recession from the prior section.
The initial equilibrium in Fig. 2.3 represents the allocation of
entrepreneurial alertness among the three types of activities: creating new
$ PNI*MPENI $ PFix*MPEFix $ PRS*MPERS
0NI E1, NI 0F E1, F 0RS E1, RS
Fig. 2.3 The allocation of entrepreneurial alertness into the three types of activ-
ities: new investment (NI), fixing the allocations of existing factors of production
(Fix), and rent-seeking (RS) (Source Author’s creation)
investment (“NI” subscript), fixing the allocations of existing factors of

production (“Fix” subscript), and securing profits through rent-seeking
(“RS” subscript). Entrepreneurs are in equilibrium when a marginal unit
of entrepreneurial alertness in each of the three activities leads to an equal
dollar reward.
In the next step of the analysis, I assume a positive shock in the
form of government expenditures that increases the rents available to
entrepreneurs through the policy arena. In the model, the shock likely
increases both the marginal product of entrepreneurship and the price of
the marginal product. The marginal product increases because the addi-
tional government expenditures likely pertain to new projects and lead
to brand-new rent-seeking opportunities. But additional resources also
likely flow into the already-existing rent-seeking opportunities and there-
fore increase the price rewarding entrepreneurial alertness in the political
arena.
As Fig. 2.4 illustrates, increases of the two variables—the marginal
product and the price—pushes the PRS *MPERS curve up and to the
right. This increase in the demand for rent-seeking alertness increases
the opportunity cost for entrepreneurs in the other two allocations. In
the resulting equilibrium, the return on entrepreneurship in all three
possible allocations then has to increase. The equilibration also means
that the allocation of entrepreneurial alertness to rent-seeking increases
and it decreases in the other two sectors, keeping in mind the ceteris
paribus assumption. The sector that matters here is, of course, that of
the new investment projects. With the decline in alertness toward new
investment projects, the number of such projects will decline and so will
the investment, making (new) investment procyclical. The reallocation of
PRS*MPERS
$ PNewInv*MPENewInv $ PFix*MPEFix $
0NI E2, NI E1, NI 0F E2, F E1, F 0RS E1, RS E2, RS
Fig. 2.4 The allocation of entrepreneurship into the three types of activities
with an increase in the demand for rent-seeking (Source Author’s creation)
24 S. BILO
$ $ $
PNI*MPENI
PFix*MPEFix PRS*MPERS
0NI E2, NI E1, NI 0F E1, F E2, F 0RS E1, RS E2, RS
Fig. 2.5 The allocation of entrepreneurship into the three types of activities
with an increase in the demand for rent-seeking and fixing the allocations of the
existing factors of production during recession (Source Author’s creation)
entrepreneurship to rent-seeking is analogous to Baumol’s (1990) unpro-

ductive entrepreneurship, just applied to the context of business cycles
rather than to that of economic growth.
The recession causes the allocation of entrepreneurial alertness into
rent-seeking projects and the repurposing of previously misallocated
factors of production to more highly valued uses. The alertness allocated
to new investment projects then declines, leading to a decline in new
investment, which, together with other causes not included in the anal-
ysis, makes aggregate investment procyclical. What happens to alertness
to profit opportunities from rent-seeking and from reallocation of factors
depends on the specific data. Even though the demand for alertness shifts
out in both, it might be the case that only one of the two attracts more
overall entrepreneurial alertness. Figure 2.5 illustrates the example where
both see increased alertness.
Conclusion
The topic of the dynamics of recessions, discussed here, relates to a funda-
mental methodological question of how economies equilibrate. While
under normal circumstances it seems reasonable to simply assume equi-
librium, as economists routinely tend to do, this is not a plausible
assumption for a situation, such as a recession, in which it is hard to
ignore pervasive disequilibria. If equilibrium is not re-established imme-
diately, it makes sense to look for the reasons, and it seems reasonable
to assume, as I did in this paper, that equilibration itself is subject to the
scarcity of resources—not because such scarcity is present only in reces-

sions, but because it is more binding during recessions than under normal
circumstances.
Even though my discussion focuses on recessions, its conclusions are
applicable, although empirically less visible, outside of recessions, and
it addresses the methodological question of the mechanism of equi-
libration from the perspective of Kirznerian entrepreneurial alertness.
Entrepreneurial alertness has its limits, and this is more evident when
the demands on alertness suddenly increase. Entrepreneurs under such
circumstances cannot be figuratively at two places at once, and they tend
to focus on the activities they expect to be more profitable.
Acknowledgements I would like to thank Harry David, John Golden, Arielle

John, Diana Thomas, and participants in the Applied Research in Political
Economy Colloquium that took place in June 2018 in Fairfax, VA, for valu-
able comments and suggestions on earlier drafts of the present paper. I gratefully
acknowledge the financial help that I received from Mercatus Center while
working on this paper. I am responsible for all errors.
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CHAPTER 3
Entrepreneurship as Complex, Bundled

Decisions: An Inframarginal Analysis
Keith Jakee and Stephen M. Jones-Young
Introduction
The “theory of the firm” in modern economics is essentially an opti-
mization exercise within an equilibrium framework. It suggests a firm’s
decisions concerning inputs depend exclusively upon a given production
function and the given relative prices of those inputs. This approach has
allowed the widespread application of the familiar tools of marginal anal-
ysis and, as such, has yielded a number of insights into aspects of firm
input choices, particularly as input parameters are changed exogenously.
It does, however, have an important shortcoming: it largely assumes away
more fundamental production decisions, such as which inputs to use or
even which good to produce in the first place. Its simplicity also tends
to require an elementary production function (typically Cobb–Douglas)
K. Jakee (B)
Florida Atlantic University, Boca Raton, FL, USA
e-mail: kjakee@fau.edu
S. M. Jones-Young
United States Coast Guard, Department of Homeland Security, Washington,
DC, USA

https://doi.org/10.1007/978-3-030-42408-4_3
28 K. JAKEE AND S. M. JONES-YOUNG
and technology that is given and monolithic; the latter assumption rules
out problems of deciding which one of potentially multiple technologies
would be optimal. In other words, even though the moniker “theory
of the firm” evokes a predictive framework of considerable generality, it
largely ignores choices associated with the notion of “entrepreneurship,”
including firm creation, innovation of products and production processes,
and even what the firm should produce in the first place.
In contrast to the standard maximizing approach, we contend that
entrepreneurial choices are, first, choices over bundles of subsidiary or co-
requisite decisions that are not easily disentangled. Effectively, then, the
entrepreneur commits resources to one imagined “big-picture” state-of
the world when she makes her entrepreneurial choice, to the exclusion of
other, imagined states-of-the world. We assert these big-picture decisions
are discrete, nonmarginal choices.
The second aspect of entrepreneurial decision-making follows from the
first: entrepreneurial choices necessarily involve significant computational
complexity because they subsume many other underlying choices. It is, in
other words, difficult to determine the bundled decision that represents
the very best decision possible. In sum, if entrepreneurial decisions—
including what types of goods to produce, what production process
to use, where to locate and so on—are highly complex bundles, then
the standard microeconomic framework based on marginal conditions is
inadequate for the task.
While we contend the lumpiness and multidimensional nature of
entrepreneurial decisions make marginal tools maladapted to the task of
analyzing them, marginal analysis can be valuable in other applications. Its
usefulness can be appreciated if we divide firm decision-making into two
stages, one involving entrepreneurial decisions and the other involving the
day-to-day running of the firm. It is the second stage, when basic deci-
sions about what to produce and how to do it have already been made,
that constitutes the traditional “theory of the firm.” In this second stage,
the “mere manager”—the term used by Schumpeter ([1912] 1983, 83)—
fine-tunes a production process already in place. Such fine-tuning cannot,
by definition, change the production function, but can change the input
mix into the production function. The well-known marginal conditions
might therefore be helpful in this second stage.
The first stage, by contrast, involves an agent creating some new
production process or transforming an existing one. Since the agent
does not have a production process already in place, she must decide
3 ENTREPRENEURSHIP AS COMPLEX, BUNDLED DECISIONS … 29
“what” and “how” to produce in discrete, mutually exclusive ways. In

other words, deciding to produce one good forecloses the possibility of
producing other goods. Similarly, deciding upon a method of produc-
tion forecloses other potential methods of production. Consistent with
Schumpeter ([1912] 1983), Buchanan and Vanberg (1991), Jakee and
Spong (2003a, b, 2011), and O’Driscoll and Rizzo (2015), we char-
acterize these kinds of “big picture” entrepreneurial choices—involving
highly complex bundles of interrelated decisions—as creative leaps. And,
such a creative leap necessarily means deviating from the status quo since
the agent must confront the world in novel ways. Indeed, by rejecting the
status quo, the agent must be rejecting its implied marginal conditions,
a point consistent with Buchanan and Vanberg’s (1991) insistence that
true, creative entrepreneurship must be understood as a nondeterministic
process.
In fact, while this paper largely focuses on two dimensions—bundled
decisions and the inherent complexity of those bundled decisions—we
want to acknowledge that our approach is consistent with a nondeter-
ministic, dynamic process of creative entrepreneurship. Furthermore, it
is important to recognize that nondeterministic processes are intrinsi-
cally tied to the notion of “radical uncertainty.” Radical uncertainty is an
epistemic position that claims individuals necessarily make decisions and
carry out tasks without knowing, ex ante, all the precise consequences of
those decisions (see, i.e., Shackle 1958, 1972; Lachmann 1986). Radical
uncertainty is implied in models that take the passage of time seriously, or
what O’Driscoll and Rizzo (2015, 106) call “real time.” Real time is best
understood in contrast to what they call “Newtonian time.” The problem
with the latter concept is that it “spatializes” time, meaning it repre-
sents the flow of time as mere “‘movements’ along a line” (106). This
view, which they argue has been “uncritically adopted” across neoclassical
theory, implies the flow of time can be treated, mechanistically, like any
other parameter.
In contrast, real time suggests that, as time passes, the physical world
changes, but more importantly the social world does too: individuals—
both inside and outside of firms—pose competitive challenges, change
course in their purchases, adapt to changing circumstances, improve their
performance on tasks, reformulate mental models of the world, and
work out creative solutions to an untold number of problems; in other
words, their subjective view of the world, which informs their decision-
making framework, changes (see O’Driscoll and Rizzo, 2015, 110–118).
Crucially, learning and discovery occur with the passage of real time and
these imply knowledge about the world must evolve as time passes. From
this perspective, individuals clearly cannot know all the future implica-
tions of their actions today. As such, real time is inherently coupled with
real uncertainty, which describes, in essence, the better-known concept
of “unintended consequences.” While the notion of unintended conse-
quences is frequently referenced by economists to offer caution in the
context of state interventions, these fundamental relationships between
time and uncertainty remind us the concept has much broader relevance
in the social sphere. Indeed, the inability to fully predict the future is,
we believe, particularly applicable to entrepreneurial processes, if those
processes are set in motion by the imaginations of entrepreneurs.
While the approach we take in this paper is entirely consistent with one
that relies on radical uncertainty, we focus particularly on the discrete and
complex nature of entrepreneurial decision-making and argue these two
characteristics can be analyzed independently of radical uncertainty. As a
result, much of our argument is unrelated to the issues raised by real-
time, although we do return to considering the passage of time in the
Section entitled “Inframarginal Choice Plus Time: Path Dependence,”
which analyzes problems arising from path dependence in entrepreneurial
decision-making.1
In what may seem unusual for a paper on entrepreneurship, we largely
sidestep the two titans of entrepreneurial theory, Joseph Schumpeter and
Israel Kirzner. Instead, we take our greatest inspiration from Coase’s
(1937, 1972, 1992) calls to explain why firms (and individuals) orga-
nize some activities and not others. We focus explicitly on entrepreneurs
and the micro-level decision-making process concerning what and how
to produce. As we explain in the next section, we feel neither Kirzner
nor Schumpeter carefully analyzes this micro-level decision-making envi-
ronment confronting entrepreneurs as they decide to undertake certain
activities and not others. In addition, neither author uses methods that
inform our own.
1 Admittedly, our treatment of the time dimension is simplistic in the section, “Infra-
marginal Choice Plus Time: Path Dependence,” and it might therefore be characterized
as Newtonian time. We do this because a more complex approach to time is not neces-
sary for our purposes there, even though our argument is completely consistent with an
assumption of real-time. In other words, we think our use of basic, Newtonian time as a
more parsimonious condition: if our arguments hold under Newtonian time, they should
hold—and be exacerbated—under real time.
Despite our nontraditional intellectual footings, we feel it necessary to

emphasize that our approach is unequivocally process-oriented. We are
consistent with Hayek’s project on the knowledge problem, Buchanan’s
(1969) and Coase’s (1981) emphasis on the subjectivity of costs, and
radical-subjectivist insights on uncertainty, learning, and creativity, among
other themes. Indeed, we hope that, as the paper unfolds, our compati-
bility with a number of these market-process themes will clearly emerge,
and that our broader argument will contribute to better understanding
the process of organizing production.
We briefly explain our position on Schumpeter and Kirzner in the
next section. Section “Characterizing Entrepreneurs” presents our view of
the nature of entrepreneurship and how standard neoclassical economics
has failed to interpret it adequately. The section, “Corner Solutions and
Totals,” presents a novel, inframarginal approach to entrepreneurship.
The section, “Inframarginal Choice Plus Time: Path Dependence,” argues
that, once time is brought back into the model, the transaction costs
involved in acquiring and liquidating complex, bundled assets, combined
with the fact that the entrepreneur will be relatively more productive over
time in her current activities imply that path dependence will arise in
entrepreneurial processes.
Our Relationship to Schumpeter and to Kirzner

As suggested in the introduction, our approach focuses on the decision-
making environment confronting entrepreneurs. We take broad inspira-
tion from Coasian insights on transaction costs, but also Hayek’s (1948)
and Simon’s (1979) assertion that individuals are unable to optimize
as traditional approaches suggest, and O’Driscoll and Rizzo’s (2015)
insights on learning through time; our technical apparatus comes from
Yang (2001) and his colleagues (i.e., Yang and Ng 1993; Yang and Liu
2009). As such, our approach is not directly influenced by Schumpeter or
Kirzner, although we are considerably closer in overall perspective to the
former than the latter, which we explain in the remainder of this section.
To begin, our methodology is highly compatible with Schumpeter’s
evolutionary emphasis on “creative destruction.” For example, we concur
with Schumpeter that “… the fundamental impulse that sets and keeps the
capitalist engine in motion comes from the new consumers’ goods, the
new methods of production or transportation, the new markets, the new
forms of industrial organization that capitalist enterprise creates” (1950,
83). To state the obvious, his emphasis on “new” and his nomenclature
that emphasizes the “creative” aspect of the entrepreneurial process is
very much aligned with our approach, as we hope will be made clear in
the remainder of the paper. At the micro-level, we agree with him that
a broad, workable definition of entrepreneurial action is the “carrying
out of new combinations” ([1912] 1983, 74). Moreover, the feature that
makes entrepreneurship a “special kind of ‘function’” (79)—separate from
the “manager”—is that entrepreneurs cannot rely on established routines:
“What was a familiar datum becomes an unknown. Where the boundaries
of routine stop, many people go no further… Therefore … entrepreneurs
are a special type” (80–83). He also insists “…the new combinations are
not, as one would expect according to general principles of probability, evenly
distributed through time … but appear, if at all, discontinuously in groups
or swarms ” (223, emphasis in original). We are thus also sympathetic to
his notion of “discontinuity,” although he uses it in a macro sense and we
will use it, later in the paper, in a micro sense.
On these broad contours—and many other lesser points—we agree
with Schumpeter. However, while he provides an occasional glimpse into
the decision-making environment for entrepreneurs, he is largely uncon-
cerned with analyzing this level of the problem but rather with the
macroeconomic dynamics in a world where entrepreneurs are the instiga-
tors of change.2 As such, he does not explore how or why entrepreneurs
do some things and not others. In contrast, our attention to the micro-
level aspects of entrepreneurial decision-making means we largely avoid
the macro-level dynamics upon which Schumpeter focuses.
With Kirzner, we have fundamental methodological disagreements
(see, for example, Kirzner 1971, 1973). Before we outline those, we
acknowledge that he solved a conundrum in mainstream theory: if all
2 Writing in the first decade of the twentieth century, it is important to recognize

that Schumpeter is trying to reconcile his insights into entrepreneurial upheaval with the
Walrasian equilibrium paradigm. As such, his model should be understood as one that (1)
assumes a settled equilibrium—what he calls the “circular flow” (see his chapter 1, [1912]
1983)—that is (2) upended by some “new combination” of productive factors created by
the entrepreneur. The new combinations induce a disequilibrium where revenues exceed
the costs of all the standard inputs (e.g., capital, labor, etc.): the profits thus created are
a special return to the entrepreneur for her ability to create novel combinations. Finally,
once the entrepreneur’s methods have been copied and generally diffused throughout the
economy, (3) entrepreneurial profits are dissipated and the system finds itself in a new
“continuous flow” or equilibrium.
agents are, by definition, price-takers in perfectly competitive markets,

who, in the model, would notice and act upon price discrepancies across
different markets? Kirzner calls that agent the “entrepreneur” and so
his theory is best understood as devising the agent who “perceives”
and acts upon price differentials across markets (1973, 14). However,
this characterization—which can be summed up as entrepreneurship-as-
price-arbitrage—gives rise to a range of problems that are discussed in
considerably greater detail in Buchanan and Vanberg (1991), Jakee and
Spong (2003b, 2011), and Klein and Briggeman (2010).3 We highlight
those points that are especially problematic for our approach here.
Kirzner claims throughout his work to be repudiating “equilibrium
analysis” (Kirzner 1973, 1, 26–29), but he depends steadfastly upon
neoclassical scaffolding because he accepts its general tenets. For example,
defining the function of his entrepreneur as moving markets from some
state of disequilibrium (where price discrepancies exist between markets)
to equilibrium (where those price discrepancies have been alleviated by
entrepreneurial arbitrage) relies wholly on the equilibrium framework. In
other words, his conception of both equilibrium and disequilibrium is
entirely consistent with that in mainstream theory, as are his attendant
corollaries, such as the insistence it is only (pecuniary) profits that drive
entrepreneurs, that price discrepancies and abnormal profits only exist
in disequilibrium, and that competition between entrepreneurs “pushes
prices in directions which gradually squeeze out opportunities for further
profit-making” (1973, 15). Kirzner’s entrepreneurs therefore necessarily
move markets back to some settled, equilibrium state. In fact, Kirzne-
rian profit must come from the arbitrage opportunities inherent in price
3 Both Buchanan and Vanberg (1991) and Jakee and Spong (2003b, 2011) are critical
of Kirzner’s approach to entrepreneurship from the perspective of radical uncertainty.
Some commenters have suggested that Kirzner’s so-called “middle-ground” thesis (see,
i.e., Kirzner 1982, 1985, 1992)—developed in response to the radical subjectivist critiques
of Lachmann and others some years after the works we cite (i.e., 1971, 1973)—solves
the problems that we detail here. We disagree but cannot detail those disagreements here,
as that is an entirely different project. Buchanan and Vanberg (1991) thoroughly critique
Kirzner’s attempt to integrate the notion of creativity within his equilibrating schema and
Jakee and Spong (2003b) outline broader inconsistencies between the “early” and “later”
Kirzner.
differentials, a view that forms his entrepreneurship-as-arbitrage definition

of the entrepreneurial function.4
Kirzner is, moreover, very clearly concerned with the optimal alloca-
tion of resources, just as traditional micro theorists are. For example, in
contrasting the differences between Schumpeter’s theory of creatively-
destructive entrepreneurship and his own, Kirzner criticizes Schumpeter
for his inability to “ensure that this best course of action—which can be
carried out—will be carried out” (1971, 119). His theory is therefore not
one of disequilibria that jettisons the notion of equilibrium altogether, as
it is, for example, in Shackle’s (1972) or Lachmann’s (1986) approach,
but one that preserves equilibrium and depends upon it.5
4 Note, for example, “The pure entrepreneur… proceeds by his alertness to discover
and exploit situations in which he is able to sell for high prices that which he can buy
for low prices. Pure entrepreneurial profit is the difference between the two sets of prices.
It is not yielded by exchanging something the entrepreneur values less for something he
values more highly” (Kirzner 1973, 48).
5 Much of Kirzner’s approach is captured in the following (lengthy) quote.
We may present our dissatisfaction with the Schumpeterian scheme as follows. At

all levels of human action, whether in the market economy or the centrally planned
economy, we must distinguish two separate problems associated with ensuring that
the best possible course of action will be adopted. The first concerns the discovery of
the best available course of action, and is essentially a matter of calculation from the
relevant data. The second problem is how to ensure that this best course of action—
which can be carried out—will be carried out. … [A]s soon as one recognizes the
problem of ensuring that the individual “sees” the optimum course of action, the
importance of this entrepreneurial element, of ensuring alertness to and awareness
of “the data,” becomes apparent. ... No matter the form of economic organization,
laissez-faire or central planning or some attempted mixture, the second problem
must be faced: what can ensure that the opportunities that exist be “seen” and
embraced? It is here—in the market case—that the entrepreneurial element comes
in.
In the market system the existence of opportunities is signaled by profit opportuni-
ties in the form of price differentials. Now signals may not always be seen—but the
kernel of market theory is that a tendency exists for them to be seen. The profit
incentive is viewed as the attractive force. It is a force which not only provides the
incentive to grasp the opportunities once perceived, but which ensures a tendency
for these opportunities to be perceived. Entrepreneurship is seen as the responding
agency; the alertness of the entrepreneur to profit possibilities is seen as the social
mechanism ensuring the capture by society of the possibilities available to it. … All
this is missing in the Schumpeterian scheme (Kirzner [1979] 1971, 119, emphasis
added).
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Entrepreneurship and The Market Process 1St Edition Arielle John Full Chapter PDF

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Entrepreneurship and the Market

Process 1st Edition Arielle John

Entrepreneurship: The Art, Science, and Process for

eTextbook 978-0324365580 Entrepreneurship: A Process

Entrepreneurship: Theory, Process, Practice, 5th Asia-

Trust and Market Institutions in Africa: Exploring the

Automated Market Makers Miguel Ottina

Process Safety and Big Data Sagit Valeev

African Entrepreneurship 1st ed. Edition Leo-Paul Dana

Methods to Assess and Manage Process Safety in

More information about this series at

Mercatus Studies in Political and Social Economy

Cover illustration: © bernie_photo

1 Entrepreneurship and the Market Process 1

Part I Entrepreneurship in Theory

2 Diverted Attention During Recessions 13

3 Entrepreneurship as Complex, Bundled Decisions:

4 Conceptualization of a Kirznerian-Ethnic Entrepreneur

5 Non-Market Competition as a Discovery Procedure 97

Part II Entrepreneurship in Practice

6 The Comparative Liberty-Dignity Context

7 Economic Development Incentives: Fostering

8 Silicon Valley vs. Main Street: Regulatory Impact

Simon Bilo is Independent Economist in the USA. His current research

and public policy environment for technology startups and questions of

Fig. 2.1 The initial equilibrium, E1 , shows the allocation

Fig. 6.2 Net migration rates and quality of economic institutions

Table 5.1 The context of human action 99

Entrepreneurship and the Market Process

Diana W. Thomas and Arielle John

Why Entrepreneurship Is Important

© The Author(s) 2021 1

and output in different markets with specific emphasis on the allocation

its intersection with individual indifference curves, this market process

While Kirzner develops his theory of entrepreneurship in the context

pre-and post-independence, some appear to be more alert to opportuni-

Thomas and Thomas (2014) consider the limits of the application of

Applied Research in Political

exploitation of entrepreneurial opportunities.” Kouassi’s chapter offers a

the variability in new business starts across different industries, and

Diverted Attention During Recessions

© The Author(s) 2021 13

of the misallocation of existing irreversible investment. Witnessing a

entrepreneurial inputs” (1990, 897), understanding the term “input” as

Alertness and the Metaphor of Allocative Choice

decision regarding the factors is then a technological problem that

the topic of entrepreneurship. He points out that it is perhaps impos-

Quasi-Rents and Profit Opportunities

How much of this quasi-rent the prospective owner or employer has to

Fig. 2.1 The initial equilibrium, E1 , shows the allocation of entrepreneurial

Allocation of Alertness During

Fig. 2.2 The new equilibrium, E2 , illustrates a change in the allocation of

Allocation of Alertness During

$ PNI*MPENI $ PFix*MPEFix $ PRS*MPERS

0NI E1, NI 0F E1, F 0RS E1, RS

investment (“NI” subscript), fixing the allocations of existing factors of

0NI E2, NI E1, NI 0F E2, F E1, F 0RS E1, RS E2, RS

entrepreneurship to rent-seeking is analogous to Baumol’s (1990) unpro-

scarcity of resources—not because such scarcity is present only in reces-

Acknowledgements I would like to thank Harry David, John Golden, Arielle

Entrepreneurship as Complex, Bundled

Keith Jakee and Stephen M. Jones-Young

© The Author(s) 2021 27

$ PNIMPENI $ PFixMPEFix $ PRS*MPERS